Paper gold: Promises galore, but physical metal still shines

The fetish for gold jewellery among Indians is well known. But are they equally conscious of the investment potential of paper gold?

Thus far, the response has been lukewarm. But experts expect it to pick up in the longer term.

The oldest paper gold are the gold exchange traded funds (ETF), which are like mutual funds listed on stock exchanges. Once bought, they represent the physical form of the yellow metal in an electronic form. Prices are listed as per the prevailing gold rates, and it can be bought or sold like any other share or mutual fund.

“Gold ETF as an investment option gained a lot of pace after it was introduced, coinciding with the rising prices of the metal at that time. Once the mutual fund industry entered a flat phase, so did gold ETFs,” Somasundaram P.R., managing director of World Gold Council-India, told IANS.

“But I am positive that in the long run the growth rate of investment in gold ETF will increase as it is a low-base investment,” he added.

There are currently 14 gold ETFs listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), with total assets under management of around Rs. 6,800 crore (a little over $1 billion). Gold ETFs were introduced in India in 2006-07.

The other form of paper gold is the monetisation scheme announced by Finance Minister Arun Jaitley during his budget speech earlier this year. The stakeholders said they were also awaiting the norms on the gold monetisation scheme that proposes to allow people to deposit physical gold of 30 grams and above with banks, get a certificate and also earn interest. The government has issued draft guidelines and the norms are expected soon.

“The scheme will benefit industry as it will get some extra gold. The government can leverage it with recycling, transparency and more jobs, while customers will benefit as it would keep gold as an attractive asset,” Somasundaram said. This will also be in a non-physical form like ETFs.

“ETF is structured product, tailor made to suit the retail segment in particular. Its small size gives convenience to investors. We are certain gold ETF products listed on the NSE will grow manifold in the near future,” said Ravi Varanasi, chief of business development with NSE.

But as of now, the attraction that physical gold holds for the majority has not waned. In Kerala, this emotional attachment is more palpable. People buy it in the form of coins, bars and jewellery. Only in recent times are gold ETFs being looked at.

“The addiction to gold ornaments is more in Kerala and hence it’s natural that not many are trading in gold ETF,” said Rajendran V., managing director of Capstocks and Securities, a Thiruvananthapuram-based stock broking firm.

He said just one percent of his clientele invests in gold ETF.

“There seems to be a clear divide in the attitude of investors towards physical gold and gold ETF. While older investors prefer the emotional bondage with gold, it is the new-generation ones who are looking at gold ETFs as an investment,” Sanil Kumar, national sales head of leading investment advisory Geojit BNP Paribas, said in Kochi.

Industry stakeholders also said paper gold will become the trend once an awareness is created about its easy tradeability and safety. As an investment, youth would prefer gold in dematerialised form.

“While people may continue to buy jewellery, there will be a demand for ETFs in the coming years. From an investment point of view, a portfolio of 10-15 percent in form of gold coins or ETFs is recommended,” said Rajat Ghosh, founder of R.G. Financial Services, in Kolkata.

“So far, in Kolkata I have not seen too many people opting for gold ETFs or coins. But ETF is a good investment option. In my opinion, it will take another three-four years to gain its market recognition as an investment option.”

According to Bangalore-based G. Sreedhar, acting chairman of the All India Gems and Jewellery Trade Federation, even the educated and young people have an attraction towards physical gold rather than having ETFs.

“Physical gold always has immediate liquidity and demand. Even at midnight it can be encashed and people are more secure with physical gold.” But what about the popularity of gold ETFs among the youth: “Maybe it is gaining popularity. But overall, physical gold is the preferred choice.” (IANS)